Inheritance tax should be slashed to 10%, say MPs

A cross-party group of MPs want to change inheritance tax and gift-giving rules

A cross-party group of MPs is calling for a radical shake-up of inheritance tax (IHT), cutting it from 40% to 10%.

They also suggest scrapping the rule that currently allows gifts to be made tax-free so long as the giver lives for seven years after they make the gift.

A report by the All-Party Parliamentary Group (APPG) for Inheritance and Intergenerational Fairness, says IHT is “unpopular” and "ripe for reform”.

Currently, IHT is charged at 40% on estates above £325,000, or £650,000 for married couples or civil partners.

Assets given away seven years before death are also exempt from IHT.

The APPG says that it wants to cut IHT to 10% for estates above £325,000, while those above £2 million would pay 20%.

The seven-year rule would also be replaced with a 10% tax on all lifetime gifts above £30,000 each year.

The report says that small estates would therefore not pay the gift tax, while larger estates would be able to avoid it as donors presently can by making gifts seven years before their death.

John Stevenson MP, chairman of the APPG, says: “The huge complexity around how the tax is levied, and the reliefs available on it, leads to lots of confusion and a strong sense of injustice. The rich get away with not paying and IHT is perceived as an unfair penalty on hard working savers.

"Our bold proposals for reform seek to address this unfairness by simplifying the system and ensuring that the higher value estates that currently take advantage of so many reliefs and exemptions actually pay some IHT."

A Treasury spokesman says: “IHT makes an important contribution to the public finances. We keep the tax system under constant review and will consider the APPG’s findings.”

Inheritance tax: what you need to know

IHT is a tax on the estate – property, money and possessions – that is paid when someone dies.

It is payable when the assets of an estate total in excess of £325,000. Any assets above this amount are liable to a tax of 40%.

However, married couples can combine their IHT thresholds, meaning that up to the first £650,000 of their combined estate is IHT-free, as any unused nil-rate band can normally be passed on to the surviving spouse.

There is also an additional threshold called the Residence Nil Rate Band, which is increasing year-on-year. You can use the HMRC calculator to find out how much the additional threshold on your estate might be.

Inheritance tax must be paid by the end of the sixth month after the person dies.

There have been frequent calls for the tax to be overhauled in recent years.

Gift giving

The APPG anticipates the most households will remain unaffected by the changes and that smaller estates will pay nothing.

According to the APPG, fewer than 5% of deaths actually result in payment of IHT.

It says the changes would make the system fairer and help reduce tax avoidance.

However, Rachael Griffin, tax and financial planning expert at Quilter, warns that some people could lose out and that taxpayers will now need to think carefully about gift giving.

She says: “We know that many parents and indeed grandparents are looking to pass on their wealth while they are still alive, be it for school fees or to get on the housing ladder.

“And with the generations of today being the first to be worse of then their parents, taxing the flow of the wealth being passed down might not win the Government many favours.”